Cash earnings definition
/What are Cash Earnings?
Cash earnings are the residual profits after cash expenses are subtracted from cash revenues. The expenses used in the calculation do not include any non-cash expenses, such as amortization and depreciation. An analyst may want to calculate this number from a company’s reported financial statements, as part of an analysis of a business.
How to Calculate Cash Earnings
There are two ways to calculate cash earnings. As just noted, you can subtract cash expense from cash revenues. This approach works well when a business is issuing financial statements under the cash basis of accounting. Another option is to start with the net income figure reported under the accrual basis of accounting, and then subtract out non-cash income and add back non-cash expenses. The formula is as follows:
Net income - Non-cash income + Non-cash expenses = Cash earnings
Example of Cash Earnings
As an example of how to calculate cash earnings, Henry wants to purchase a new copier for his document reproduction shop, for which the cost is $50,000. He decides to only make the investment if his business is already generating cash income of at least $50,000 per year. In the immediately preceding year, the income statement for his business showed net income of $40,000. This initial perusal of the information seems to indicate that Henry will not be able to purchase the copier. However, the cash earnings formula also allows him to add back non-cash expenses. His business has invested heavily in copiers, so he has a large amount of depreciation - $20,000 in the past year. Depreciation is a non-cash expense. By adding the depreciation amount to the net income figure, Henry finds that his cash earnings were actually $60,000. Therefore, based on his investment criteria, he can proceed with the $50,000 copier purchase.